Inheritance and wealth inequality: Evidence from population registers

(1)

Inheritance and wealth inequality: Evidence from population registers

Mikael Elinder^a, Oscar Erixson^b, Daniel Waldenström^c,⁎

aDepartment of Economics, Uppsala University, Sweden and the Research Institute of Industrial Economics (IFN), Sweden

bDepartment of Economics, Uppsala University, Sweden

cResearch Institute of Industrial Economics (IFN) and Paris School of Economics, CEPR, IZA, France

a b s t r a c t a r t i c l e i n f o

Article history:

Received 24 June 2016

Received in revised form 26 June 2018 Accepted 26 June 2018

Available online 18 July 2018

JEL classiﬁcation:

H24 D63 E21

This paper uses population register data on inheritances and wealth in Sweden to estimate the causal impact of inheritances on wealth inequality. Wefind that inheritances reduce wealth inequality, as measured by the Gini coefficient or top wealth shares, but that they increase absolute dispersion. This duality in effects stems from the fact that even though richer heirs inherit larger amounts, the relative importance of the inheritance is larger for less wealthy heirs, who inherit more relative to their pre-inheritance wealth. This is in part driven by the fact that heirs do not inherit debts, which makes the distribution of inheritances more equal than the distribution of wealth among the heirs. Behavioral adjustments seem to mitigate the equalizing effect of inheritances, possibly through higher consumption among the poorer heirs. Inheritance taxation counteracts the equalizing inheritance effect, but redistribution of inheritance tax revenues can reverse this result and make the inheritance tax equalizing. Finally, we alsofind that inheritances increase intragenerational wealth mobility, but the effect is short-lived.

creativecommons.org/licenses/by/4.0/).

Keywords:

Bequests Estates Net worth Inheritance taxation Wealth distribution

1. Introduction

The evolution of wealth inequality and its determinants have received tremendous attention in recent years. After decades of de- creasing or relatively low levels of wealth inequality throughout the Western world, wealth inequality may now be on the rise.¹A small but growing body of research has also shown that the importance of inherited wealth has increased recently (Piketty, 2011;Ohlsson et al., 2014). If wealthy children inherit from wealthy parents and inheritances therefore primarily beneﬁt a small elite, there may be a link between increased inheritanceﬂows and increased inequality in the wealth distribution.

In this paper, we investigate the impact of inheritances on the distribution of wealth. Although we are not theﬁrst to address this issue, it is

fair to say that a consensus has not been reached in the literature about whether inheritances increase or decrease wealth inequality. To the best of our knowledge, we are, however, theﬁrst to use population- wide individual-level data on both inheritances and wealth to estimate the causal effects of inheritances and characterize the underlying mechanisms. We also contribute by studying the impact of inheritances on wealth mobility and the ways in which inheritance taxation inﬂuences wealth inequality.

At our disposal is a new population-wide database that contains detailed individual-level information about the estates and bequests of all Swedes who passed away during the 2002–2004 period. Our analysis is based on 168,000 decedents, and of all their family and non-family heirs, comprising 475,000 individuals. The panel dimension of the data allows us to follow heirs and their marketable net worth (which we will hereafter refer to as wealth) for several years—both before and after they inherit.

Our identiﬁcation strategy relies on observing inheritances and wealth distributions for yearly cohorts of heirs. Two different causal effects are identiﬁed. First, we estimate a direct mechanical effect (DME), which captures the immediate impact of inheritances, and occurs before any behavioral responses (i.e., before heirs can consume the inheritance). Although we ideally want to evaluate this effect by comparing inequalities just before and just after heirs receive their inheritances, we come close to identifying this effect by comparing wealth inequality at the end of the year preceding the inheritance year, with a

⁎ Corresponding author.

E-mail addresses:mikael.elinder@nek.uu.se(M. Elinder),oscar.erixson@nek.uu.se (O. Erixson),daniel.waldenstrom@psemail.eu(D. Waldenström).

1Roine and Waldenström (2015)document long-run trends in wealth concentration throughout the Western world since the industrial era (see alsoPiketty and Zucman, 2015). In terms of recent developments, few countries offer consistent wealth inequality trends. For the United States,Saez and Zucman (2016)present evidence that suggests dra- matic increases in wealth inequality (but the exact size and timing of the increase is discussed, e.g., byKopczuk, 2015andBricker et al., 2015). For Sweden,Lundberg and Waldenström (2018)document modest increases in the years following the Great Recession.

https://doi.org/10.1016/j.jpubeco.2018.06.012

Contents lists available atScienceDirect

Journal of Public Economics

j o u r n a l h o m e p a g e :w w w . e l s e v i e r . c o m / l o c a t e / j p u b e

(2)

measure of post-inheritance wealth inequality, obtained by adding the value of the inheritance to each heir's wealth in the year preceding the inheritance year.

The second effect, denoted the behavior-adjusted effect (BAE), shows that heirs may change their behaviors in response to their inheritances, e.g., by consuming or investing part of their inheritances or by working less. We identify this effect by using a difference-in-differences estimator, which compares pre-inheritance inequality with post-inheritance inequality across the three sequentially inheriting cohorts. Heirs who inherit one or two years later serve as the control group for those who inherit in a given year. Note that our focus on heirs only is not very re- strictive because everyone will inherit at some point (although a zero amount in some cases).²This estimation strategy effectively removes biases stemming from macroeconomic events that might inﬂuence wealth inequality from one year to the next, as well as biases stemming from the aging of heirs. As pre-inheritance inequality trends are almost perfectly parallel across inheritance cohorts, we are conﬁdent in making a causal interpretation of the estimated effects.

Our main finding is that inheritances reduce relative wealth inequality. The direct mechanical effect works to reduce the Gini coefficient by approximately 7%. As a point of reference, this decline is about as large as the equalization following the dotcom crash in 2000, when the stock prices of internet companies, presumably owned by the rich, plummeted. Examining different parts of the wealth distribution, wefind that the top decile's wealth share decreases substantially, whereas the wealth share of the bottom half increases from a negative to a positive share.

While inheritances reduce relative inequality, weﬁnd that they increase the absolute dispersion of wealth. This discrepancy between relative and absolute inheritance effects exists because, while wealthier heirs inherit larger amounts, less wealthy heirs receive much larger inheritances relative to their pre-inheritance wealth.

Behavioral adjustments appear to dilute the equalizing impact of inheritances. The behavior-adjusted effects are generally smaller than the direct mechanical effects; for example, the Gini coefﬁcient falls by 4% rather than 7%. This equality-diluting effect is consistent with previous research showing that less wealthy heirs spend a larger share of their inherited wealth than wealthier heirs (Druedahl and Martinello, 2017).

We are also able to present theﬁrst register-based empirical estimates of how inheritance taxation affects wealth inequality, exploiting information about actual individual tax payments.³The results indicate that the inheritance tax increases wealth inequality, reﬂecting that less wealthy heirs pay more in taxes relative to their wealth than wealthier heirs do. Still, wealthier heirs pay higher inheritance taxes, but their tax payments are almost always negligible relative to their wealth.

However, we show that the redistribution of inheritance tax revenues can reverse this result and make the inheritance tax equalizing.

Moreover, we estimate the effect of inheritances on wealth mobility.

The welfare interpretation of our inequality results may partly depend on whether heirs switch places in the wealth distribution or retain their ranks after they inherit. Weﬁnd that, overall, mobility rises substantially, with increased mobility across all parts of the wealth distribution.

A series of sensitivity checks suggest that our mainﬁndings are robust across several dimensions. First, they do not change when the observed wealth levels are adjusted for potential measurement errors in our wealth and inheritance data. Second, they do not seem to be driven by unobserved inter vivos gifts from wealthy decedents; if anything, adding estimated gifts strengthens the equalizing impact of

inheritances. Third, only analyzing inheritances from parents to their children (and neglecting one-third of heirs with more distant family or non-family ties) has a negligible impact on our conclusions. Fourth, we study the importance of young heirs (40 and younger), who could be driving the results because they tend to have relatively little wealth and thus should be affected relatively more by inheriting. While inheritance effects are indeed substantially larger in this younger group, inheritance effects are also important among older heirs. Finally, we exploit parent-child correlations in wealth accumulation and sudden deaths to examine whether heirs adjust their saving behaviors in response to expectations about future inheritances. If such responses were quantitatively important, we would miss a relevant aspect of how inheritances influence the wealth distribution. However, we find no indications of their importance or influence in the data.

Our study contributes to the previous empirical literature on the distributional consequences of inherited wealth.⁴One group of studies uses simulation methods to model people's savings and giving behavior to calibrate synthetic wealth and inheritance distributions. A sweeping generalization is that these studies tend toﬁnd that inheritances consti- tute a major source of wealth inequality.⁵

Another group uses individual-level data on people's self-reported wealth and their receipt of gifts and inheritances. The seminal contributions ofWolff (2002, 2003, 2015)andWolff and Gittleman (2014)use data from the Survey of Consumer Finances to estimate how gifts and inheritances inﬂuence the distribution of wealth in the United States.

A consistentﬁnding in these studies is that the rich inherit more than the less afﬂuent, but that the rich inherit less relative to their existing wealth, causing inheritances to have an equalizing effect on the distribution of wealth. Similar equalizing effects of inheritances are found in survey data from the United Kingdom (Karagiannaki, 2015;Crawford and Hood, 2016), Japan (Horioka, 2009), Sweden (Klevmarken, 2004) and eight EU countries (Bönke et al., 2017).

In a study closely related to ours,Boserup et al. (2016)examine Danish individual-level tax register data on wealth to estimate the effect of inheritances on wealth inequality. The identification of the effect is based on following the wealth of children (45 to 50 years old) before and after the demise of their parents and then comparing this evolution to the wealth of similarly aged children whose parents did not pass away during the study period. The mainfindings are similar to ours, that is, inheritances cause an increase in the absolute dispersion of wealth and a decrease in the relative wealth inequality. Theyfind larger equalizing effects than we do, although our studies cannot be directly compared with each other. While their approach has several similarities with our BAE analysis, our population is different from theirs in that it includes all adult heirs (not only children). The key difference, however, is that our data contain information about the value of their inheritances, which allows us to estimate the direct mechanical effect and dig deeper into how and why inheritances affect wealth inequality and mobility. It also allows us to study how inheritance taxation affects wealth inequality.⁶

The remainder of the paper is structured as follows.Section 2 presents the institutional context and the data.Section 3presents our

2 Had we instead compared heirs with the entire population, that would have resulted in a control group containing a combination of individuals, some of which had already inherited and some who were still to inherit at some future point in time and we would have no possibility to know which one of these would be true in each case.

3 Castañeda et al. (2003),Cagetti and De Nardi (2009)andBenhabib et al. (2011)calibrate dynamic models to evaluate the impact of the U.S. estate tax on income and wealth inequality.

4 SeeDavies and Shorrocks (2000)andWolff (2015, chapter 2)for reviews of this literature.

5 A disequalizing effect of inheritances is in accordance with exchange models, which are predicated on the idea that the most supportive—and typically the most resourceful—heirs receive more transfers in exchange for their support of donors (Bernheim et al., 1985;Cox, 1987). Other models of intergenerational transfers emphasize the role of family patterns, e.g., assortative mating, fertility or estate division, and luck components, in distributional outcomes. Some of these models suggest that inheritances are equalizing (e.g.,Laitner, 1979a, b;Gokhale et al., 2001), while others suggest a disequalizing impact of bequests (e.g.,Atkinson, 1971;Blinder, 1973;Davies and Shorrocks, 1978;Davies, 1982;Davies and Kuhn, 1991;Greenwood and Wolff, 1992;De Nardi, 2004).

6 In a recent paper using Swedish register-based microdata,Nekoei and Seim (2018)directly address how inheriting affects both consumption behavior and wealth inequality;

and have reported that consumption responses may dilute the equalizing effects of inheritances in the long-run.

(3)

mainﬁndings.Section 4explains how wealth mobility is inﬂuenced by inheritances, andSection 5discusses the role of inheritance taxation.

Section 6discusses some implications of ourﬁndings.

2. Institutional context and data

In this section, we present the Swedish legislation regarding inheritances and inheritance taxation. Moreover, we provide descriptions of the data and the study population and discuss the various measures of wealth inequality that we use in the empirical analysis.

2.1. Inheritance legislation and taxation

In Sweden, when a person passes away, an estate inventory report should be filed with the tax agency, reporting the values of the decedent's assets and debts. If the decedent has a positive net worth, his or her estate is distributed to the heirs according to a succession scheme that is based on genetic relationships. The decedent's relatives are classified into three groups of legal heirs: children and their offspring, parents and their offspring (the decedent's siblings, nephews and nieces), and grandparents and their children (i.e., aunts and uncles).⁷Heirs in the second (third) group inherit only if there are no heirs infirst (first or second) group. If the decedent has a spouse, the estate is transferred to him or her. If the spouses have common children, the surviving spouse receives what is referred to as free disposal of the estate, which means that the money could be spent but not bequeathed to others than the children. The common children receive the inheritance from thefirst deceased parent when the second parent passes away. The deceased's children who are not common with the surviving spouse will, on the other, hand inherit immediately when their parent passes away.

The default succession scheme can be set aside by a will, but children are always entitled to half of what they would inherit in the case of intestacy, i.e., in the absence of a will. It should be noted also that heirs do not inherit any debts that the decedents may have at the time of death.

Inheritance and gift taxes existed in Sweden until their abolishment by the end of 2004.⁸In the early 2000s, inheritances exceeding SEK 70,000 (approximately USD 11,000)⁹were taxed according to a pro- gressive three-bracket schedule, with marginal tax rates ranging from 10% (paid by heirs who inherited amounts approximately between the 70th and the 90th percentiles in the inheritance distribution) to 30% in the highest bracket on inheritances over SEK 600,000 (USD 91,000, paid by, approximately, the top 2%).¹⁰ All inherited assets were taxable, but important concessions were made to keep the effective tax down on certain assets, especiallyﬁrm equity (see also Ohlsson, 2011andHenrekson and Waldenström, 2016).

2.2. Data and study population

Our main data source is a population-wide register called Belinda. It originates from the Swedish Tax Agency and contains detailed accounts of the estates of, and inheritances, from all individuals who passed away in 2002–2004 and all of their biological and non-biological heirs. Data are available from this period because the tax agency was obliged to electronically codify all estate reports starting in July 2001, but this ob- ligation was suspended in 2005 when the inheritance tax had been abolished. To these data, we have added information from other admin- istrative registers, primarily those covering personal wealth but also

other relevant economic and demographic characteristics for both the decedents and their heirs.

In particular, the information about decedents in Belinda includes the net worth at death and its main components (total assets and total debts), the value of the estate, a list of heirs, special rules that apply to the estate and the bequests (e.g., will, prenuptial agreement, and life insurance policy) and personal details (e.g., identity number, marital status, and death date).

The information about heirs in Belinda includes the value of their received inheritance, inheritance tax payments (if any), the taxable gifts received over the past ten years, the receipt of life insurance payments from the deceased and personal details (e.g., identity number and relationship to the decedent). Inheritances from a previous decedent (e.g., a late spouse), which the current decedent possessed with free disposal, are divided between the previous decedent's heirs, and the amounts are listed separately in the database.

We deﬁne inheritance as the total net-of-tax value of inheritances and any insurance received from the decedent (unless it is explicitly stated to be the before-tax inheritance). For heirs who receive two inheritances when the decedent passes away (typically a child who receives one inheritance from the recently deceased parent and one from a previously deceased parent), we deﬁne the inheritance as the total sum of these transfers (plus any insurance payments from the two decedents, net of tax). It should be noted that the estates and inheritances observed in the data are reported at tax values, which are some- times lower than the market values. For instance, real estate was valued at the tax-assessed value, intended to correspond to approximately 75%

of the market value. In the main analyses, we use the amounts as given in the database but, in robustness tests, we investigate how the results change when we attempt to adjust the inheritance values to their market values.

We define heirs as individuals who live in Sweden and receive an inheritance through the succession order, are beneficiaries of a will, or are beneficiaries of a life insurance policy. We focus on the final estate division of a household and, therefore, do not include heirs who were the spouse or partner of the decedent in our study population. We further restrict our attention to heirs who were at least 18 years old in the year when the decedent passed away because inheritances received by minors fall under the protection of a guardian and are, in practice, controlled by the parents.¹¹

A key feature of our analysis is our classiﬁcation of heirs into inheritance cohorts according to the year when the deceased passed away. We thus have three inheritance cohorts: 2002, 2003 and 2004, covering a total of 475,120 heirs connected to 168,055 decedents.

Wealth data are collected from the wealth register of Statistics Sweden, which is available for the 1999–2007 period, i.e., several years before and after the 2002–2004 inheritance years. The wealth register contains detailed accounts of real andfinancial assets and debts, all recorded in market values at each year's end, for all individuals in the population. We focus on private net worth, which is the market value of real andfinancial assets less all debts. Specifically, on the asset side, the wealth portfolios comprise non-financial assets (owner- occupied housing, secondary homes, land, agricultural property, com- mercial real estate, etc.) andfinancial assets (bank deposits, listed stocks and bonds, mutual funds and otherfinancial securities). Debts are mainly mortgage loans and state-subsidized loans for higher education.

The wealth data are particularly advantageous because the bulk of the records come from third-party reports to the tax agency byﬁnancial in- stitutions. The wealth register has limited information about some assets. The register does not cover funded pension assets. In addition, closely held corporations are incompletely covered, and compared

7Cousins do not inherit according to the inheritance law. If there are no legal heirs in these three groups, no spouse, and no will, the estate will go to a public fund: the Swedish Inheritance Fund.

8The inheritance tax had been criticized for complicating the succession of familyﬁrms and for generating unreasonably large tax payments for widows.

9Using the exchange rate as of Dec. 30, 2004: 6.6 SEK/USD.

10For a comparison of inheritance and estate taxes between countries, seeCremer and Pestieau (2011).

11Moreover, from the study population we drop individuals for which we lack inheritance data or a personal identity number, in total 16% of the population. See Online Appen- dix A for further details about the selection of the study population and the analysis sample.

(4)

with estimates of their aggregate value reported in the Financial Ac- counts, only about one tenth is accounted for in the wealth register.

While these limitations are unfortunate, even when these assets are observed, e.g., in surveys, they are notoriously difﬁcult to value and are, moreover, not always fully marketable. Moreover, consumer durables are not well covered by the wealth register. This may be problem- atic for an analysis of distributional consequences of inheritances since these goods can be important, not least in relative terms in less wealthy households.¹²In the robustness analyses we, therefore, attempt to assess how sensitive our results are to the undervaluation of consumer durables by approximating the value of these goods using, e.g., estimated car values.

Despite some shortcomings, it should be noted that our wealth data are the same ones as those used in the international wealth data project, the Luxemburg Wealth Study (seeSierminska et al., 2006).

2.3. Descriptive statistics

This study offers theﬁrst comprehensive view of the distribution of estates and inheritances in a population-wide register (seeFig. 1).¹³ First, we observe that the distribution of the decedents' estates is highly skewed, as most of the mass is located in the left tail and 17% of the estates have zero value. The median value is just over SEK 93,000 (approximately USD 14,000), the mean is approximately SEK 264,000 (USD 40,000) and the 99th percentile of estates is approximately SEK 2.2 million (USD 330,000). The top percentile share accounts for 19%

of the total estate wealth, and the top decile accounts for 55%, which are levels that are consistent with those of previous wealth distribution studies (Roine and Waldenström, 2009). Second, the distribution of the

inheritances that the heirs receive is similar to that of the estates— skewed, with 19% of the heirs inheriting nothing at all; the top tenth of inheritances represent 56% of the total inherited wealth. Third, the graph in the lower left-hand corner displays the wealth distributions in the year before inheritance (T− 1) for each inheritance cohort.

These distributions are nearly identical across the cohorts, highly skewed (with Gini coefﬁcients of approximately 0.8, as examined further in the next section) and show that a non-negligible fraction of the heirs have zero¹⁴or close to zero wealth. Finally, theﬁgure displays the heirs' age distribution. A slight majority of the heirs (56%) are between 50 and 70 years old.

Table 1presents additional descriptive statistics. The inheritance cohorts are nearly identical in all dimensions, which is also expected, as they comprise essentially the entire population of inheriting individuals for each year.¹⁵The average wealth of the heirs one year prior to the inheritance year varies somewhat across cohorts. This variation likely reﬂects annual differences in macroeconomic conditions, particularly stock market and housing price changes. The bottom panel of the table shows statistics for the decedents. Similar to the statistics for the heirs, the differences are very small, and we thus conclude that the inheritance cohorts are also similar in terms of the characteristics of the donors.

2.4. Measuring wealth inequality

The measurement of wealth inequality is somewhat more complex than the measurement of, for instance, income inequality because some individuals have negative wealth (i.e., when debts are larger than assets). Therefore, we conduct our analyses using various unidimensional inequality measures that are deﬁned for variables containing

12Consumer durables amounted to approximately 10% of total household assets in Sweden in the early 2000s (Waldenström, 2016).

13SeeElinder et al. (2014)for a more comprehensive description of Belinda and details on estates and inheritances in Sweden.

Fig. 1. The estate, inheritance, wealth, and age distributions. Estates, inheritances and wealth are presented in SEK 1000 in 2003 constant prices. The distribution graphs of estates are calculated for the decedents (168,055) and the other graphs are calculated for the heirs (475,120). The top percentile is excluded in the estate and inheritance distribution graphs. The top and bottom percentiles are excluded in the wealth distribution graph. The bandwidths used in the estate, inheritance, and wealth graphs are SEK 50,000, 20,000 and 150,000, respectively. The reported densities (vertical axes) are scaled with the bandwidths.

14 3% have exactly zero wealth.

15 In Online Appendix B.1, Table B1, we display comparisons of the heir-decedents relationships for the three cohorts.

(5)

positive as well as negative values.¹⁶Our focus is on the Gini coefficient, which is the most widely used inequality measure. While the statistical properties of the Gini coefficient are fully intact when negative values exist, the normative interpretations from a certain level or trend may be less straightforward (e.g., How should the negative shares of a pie be distributed?). We complement the analysis with other unidimensional inequality measures that can handle negative values: top and bottom wealth shares, wealth percentile ratios, and a measure of absolute dispersion (the interquartile wealth range, and, in the Online Ap- pendix, also the range between the 1st and 99th wealth percentiles, as well as the coefficient of variation).

3. The effect of inheriting on wealth inequality

We estimate two types of inheritance effects on wealth inequality among heirs: one direct mechanical and one behavior-adjusted.

Conceptually, the direct mechanical effect (DME) represents the immediate distributional change that arises from adding the inherited amount to the heirs' pre-inheritance wealth. This is our main estimator of interest as it offers the clearest channel from inheritance to inequality change. The behavior-adjusted effect (BAE) accounts for behavioral responses among heirs, which reﬂect that receiving an inheritance may inﬂuence labor supply, consumption and investment decisions that, in turn, may affect wealth accumulation and inequality. The estimations of the two effects are performed both non-parametrically, showing how the distribution changes graphically, and for the different unidimensional measures of inequality.

We focus on heirs of all the decedents who passed away between 2002 and 2004. Focusing on heirs is a natural starting point for our study of the distributional consequences of inheritances because almost everyone inherits sooner or later in life, whether the inheritance is a tiny amount (or even zero) or a larger sum.

3.1. The direct mechanical inheritance effect

The DME captures how the wealth distribution among the heirs will change if the heirs save their entire inheritances and nothing else happens. To evaluate this effect, we would like to compare the inequality in the wealth distribution in the period just before the heirs inherit to the inequality in the distribution in the period just after the inheritance. Denoting the measure of the wealth distribution of interest D^W(e.g., the Gini coefﬁcient), the time of the inheritance T and the length of time until the inheritanceε, the DME on D^Wwould be given by D_T+ε^W − DT−εW . To estimate the DME using this strategy,ε would need to be extremely small (e.g., one day) to avoid the inﬂuence of behavioral responses. However, we do not know the exact date when heirs received their inheritances (only the date when the decedents passed away), and we only observe their wealth on December 31 of each year. Comparing wealth distributions in the years before and after inheritance is clearly a too long time span to identify the DME because behavioral responses and changes in macroeconomic conditions may confound the estimates.

Instead, we will estimate the DME by comparing inequality in the wealth distribution one year prior to the inheritance with a measure of wealth inequality that is obtained by adding the value of the inheritance (received in year T) to each heir's wealth in the year before the inheritance. In terms of notation, we will estimate DME as follows:

DME¼ D^WþI_T−1−D^W_T−1; ð1Þ

where D_T−1^W is the measure of wealth distribution in the year prior to the inheritance, and D_T−1^W+Iis the same distributional measure that is calculated for the distribution of the sum of wealth (in T− 1) and the inheritance I.

To examine the statistical robustness of the effect, we compute standard errors by bootstrapping the estimates using 1000 repetitions. The standard errors are typically very small, reﬂecting both that the DMEs are mechanical in nature, without any stochastic element, and the large size of the dataset.

3.1.1. Estimation results: direct mechanical effect

We start by presenting a non-parametric estimation of the DME, which evaluates how the density distribution of wealth changes as a consequence of inheritances.Fig. 2shows how the wealth distribution changes at different wealth levels when we add each heir's inheritance to his or her pre-inheritance wealth. Clearly, a pronounced drop in Table 1

Comparison of cohort means for economic and demographic variables.

Inheritance cohort

2002 2003 2004

Characteristics of heirs

Age at inheritance 54.0 54.1 54.4

Child of the decedent (%) 58.8 59.5 57.7

Woman (%) 50.6 50.4 50.7

Married (%) 53.3 52.7 52.2

Upper secondary or post-graduate degree (%) 24.7 25.5 25.6

Taxable labor income 224,600 228,800 230,900

Wealth T− 1 643,900 593,500 627,700

Gross inheritance 94,600 96,100 101,400

Net inheritance 83,600 85,300 89,500

Paying inheritance tax (%) 35.8 36.4 37.6

Received taxable gifts (%) 2.0 2.0 2.1

Taxable gifts 2800 3000 3000

Characteristics of decedents

Age 80.9 80.7 81.0

Woman (%) 61.2 60.3 61.0

Marital status

Widow/widower (%) 60.3 59.5 60.5

Never married (%) 17.0 17.1 17.3

Divorced (%) 17.0 17.7 18.0

Number of heirs 2.81 2.80 2.86

Number of children 1.65 1.67 1.65

Estate 263,300 257,100 273,700

Number of decedents 58,925 57,213 52,083

Number of heirs 165,641 160,387 149,092

Notes: All monetary values are measured in the year prior to the inheritance, and they are expressed in 2003 constant prices, rounded to nearest hundreds. Means of the decedents' characteristics are calculated over the number of decedents.

16The Theil and Atkinson indices are examples of inequality measures that cannot handle negative values. For more detailed discussions of inequality measures with negative values, seeCowell (2013)andOECD (2013, Ch. 7).

Fig. 2. Non-parametrical illustration of the DME on the wealth distribution. The graph (solid) displays the difference in densities (using bins of SEK 250,000) between the distributions in T− 1 of wealth and of wealth plus inheritances, i.e., DT−1W+I− DT−1W . The estimates are based on data on 475,120 heirs (2002–2004 cohorts). The conﬁdence bands (dashed) are based on bootstrapped standard errors (1000 repetitions). Wealth (SEK 1000) is presented in 2003 constant prices.

(6)

density occurs around zero wealth, and a sizable increase in density occurs at moderate wealth levels. Thus, heirs with zero (or almost zero) wealth move up in the distribution after having received inheritances.

By contrast, no changes appear at very low (negative) and very high wealth levels. In these segments, the densities are similar both before and after inheritance, and the differences in the graph are accordingly quite close to the zero line. In other words, adding inheritances to the heirs' pre-inheritance wealth has the largest inﬂuence, quantitatively, on the middle parts of the wealth distribution, whereas the tails are nearly unaffected.

We now shift focus to estimate the DME on unidimensional measures of wealth inequality. We seek to quantify the distributional effects of inheritance in terms of standard measures of inequality, which, in turn, facilitates comparisons with other factors and events that affect the wealth distribution.

Panel A ofTable 2presents the DME onfive unidimensional measures of inequality that were discussed inSection 2.4.¹⁷The estimated effects with respect to these measures mirror the pattern displayed in Fig. 2. First, we see that the relative inequality decreases. The Gini coefficient falls from 0.804 to 0.748 (averaged over the three inheritance cohorts), corresponding to a reduction of 7% - a substantial equalization effect. For example, this drop in the Gini coefficient is larger than that following the dotcom bubble in 2000, when stock prices fell sharply, affecting primarily stockholders (who are typically in the top of the distribution).

Similar results, showing an equalizing effect, are found for the other measures of relative inequality. The wealth percentile ratio P90/P50 falls quite substantially—by approximately 17%. The wealth share of the top decile also falls, from 55.9 to 52.3% (a 7% drop), while the wealth share of the bottom half of the distribution actually increases from minus 1.5% to plus 2%.

Interestingly, the measure of absolute dispersion, the wealth percentile gap P75–P25, increases by 8%, which conﬁrms the pattern of a high correlation of wealth across generations, in general, and between the heirs' wealth and inheritance amounts in particular.

In summary, the results with respect to the DME indicate that inheritances equalize the wealth distribution of heirs, an effect that is consistent across both non-parametric estimation of the change in distribution and a range of well-known wealth inequality measures. In addition, the data conﬁrm the conventionally held view that richer

heirs inherit more than poorer heirs do, as indicated by the increased absolute dispersion of wealth.

Our results so far show the effect of inheritances on the wealth distribution among all heirs, not only the children of the decedents. To fa- cilitate comparisons with previous studies focusing on children heirs, and to rule out the possibility that our results are driven by including all family and non-family heirs, panel B ofTable 2presents the DME estimates for a sample consisting only of the decedents' children. The point estimates indicate a slightly larger equalizing effect of inheritances and a larger increase in the absolute dispersion among the children-heirs, but the differences between the two samples are small.

We, thus, conclude that the choice of including or excluding heirs other than the children of the decedents is not important for our main conclusion that inheritances decrease relative inequality and increase absolute dispersion.

InTable 3, we present results from several additional robustness tests. We show that the equalizing effects are more pronounced among the younger (and less wealthy) heirs, but still important across all ages and that our results are robust to the inclusion of heirs younger than 18 years, at the time of the inheritance (see panels A and B, and Online Appendix B.2.1 for details).¹⁸Moreover, we perform several tests intended to assess how sensitive our results are to alternative mea- surements of wealth and inheritance measures. These tests showﬁrst, that the underreporting of consumer durables in our main wealth measures and, second, that using inheritances at market values (rather than at tax values as recorded in the data), have a minimal impact on our results (see panels C–E, and Online Appendices B.2.2 and B.2.3 for details).

Finally, we dig deeper into how inheritance offinancial and real assets affect inequality in the distributions offinancial and real assets (see panels F and G, and Online Appendix B.2.4 for details). Sincefinancial Table 2

DME on wealth inequality.

Outcome (1) (2) (3) (4) (5)

Gini P90/P50 Top 10% Bottom 50% P75–P25

Panel A: analysis sample

Inheritance effect −0.056⁎⁎⁎ −1.122⁎⁎⁎ −0.036⁎⁎⁎ 0.035⁎⁎⁎ 63,822⁎⁎⁎

(0.0004) (0.014) (0.0004) (0.0004) (995) Mean of outcome

T− 1

0.804 6.665 0.559 −0.015 767,262

Effect in % −7 −17 −6 . 8

Panel B: children only sample

(0.001) (0.023) (0.001) (0.001) (1416)

Mean of outcome T− 1

0.823 6.913 0.577 −0.024 773,970

Effect in % −8 −19 −7 . 11

Notes: The estimates in panel A are based on data on 475,120 heirs (2002–2004 cohorts) and estimates in panel B are based on data on 278,781 children heirs (2002–2004 cohorts).

Bootstrapped standard errors are presented in parentheses (1000 repetitions). * significant at the 10% level, ** significant at the 5% level, *** significant at the 1% level. Effect in

% is calculated as (Inheritance effect / Mean of outcome T– 1) × 100.

17In Online Appendix B, Table B2 (Panel I), it is shown that the DMEs for additional unidimensional (wealth share of top 1%, P99/P50, coefﬁcient of variation (CV) and P1–P99) display patterns that are akin to the DMEs for theﬁve main measures.

Table 3

Robustness tests and additional results.

Outcome (1) (2) (3) (4) (5)

Gini P90/P50 Top 10% Bottom 50% P75–P25

Panel A: excluding young heirs

Effect % −6.3 −12.7 −5.7 . −6.5

Panel B: including minors

Effect % −7.1 −17.9 −6.5 . 8.9

Panel C: adding consumer durables, approximation

Effect % −6.1 −13.8 −5.6 . 6.4

Panel D: adding consumer durables, car values

Effect % −6.5 −14.6 −5.968 . 7.3

Panel E: market value adjustment of inheritances

Effect % −8.1 −19.6 −7.3 . 11.9

Panel F:ﬁnancial assets

Effect % −7.1 −35.6 −9.5 . 26.7

Panel G: real assets

Effect % −2.4 −5.1 −2.5 . 4.4

Notes: The estimates in Panel A are based on data on 404,852 heirs (2002–2004 cohorts).

The estimates in Panel B are based on data on 484,725 heirs (2002–2004 cohorts). The estimates in panels C–G are based on data on 475,120 heirs (2002–2004 cohorts).

Bootstrapped standard errors are presented in parentheses (1000 repetitions). * significant at the 10% level, ** significant at the 5% level, *** significant at the 1% level. Effect in

% is calculated as (Inheritance effect / Mean of outcome T– 1) × 100.

18 The available evidence regarding life-cycle wealth proﬁles in Sweden conﬁrms that people generally have little wealth before they enter their 40s (see, e.g., for Sweden, Ohlsson et al., 2014), which is also true in our population of heirs.

(7)

assets are more liquid than real assets, inheritances containing more real estate will affect consumption possibilities in the short run less than inheritances containing morefinancial assets. We find that inheritances reduce inequality in bothfinancial and real estate assets, but that the effect is more pronounced forfinancial assets. This follows, as we show in Fig. B1, from the fact that inheritances typically contain equal amounts of real andfinancial assets and that a large fraction of heirs own real estate while only relatively few (but rich) had substantial amounts infinancial assets.

3.1.2. How can the equalizing effect be explained?

The result that inheritances lead to lower relative wealth inequality is explained by the distribution of inheritances being more equal than the distribution of wealth among the heirs. If the distribution of wealth of decedents is more equal than the distribution of wealth among heirs and all decedents split their wealth equally between their children and have the same number of children, then the distribution of inheritances will also be more equal than the distribution of wealth among the heirs.

These conditions appear to be met in our data. The Gini coefﬁcient for the distribution of wealth among the decedents (in the year before the demise) is 0.76 and the Gini coefﬁcient for the distribution of inheritances (net of taxes) is 0.73, while the Gini of the wealth distribution among the heirs (in the year before inheriting) is 0.80. Because wealth is positively correlated across generations (see, e.g.,Charles and Hurst, 2003),¹⁹ wealthier heirs receive larger inheritances in absolute amounts, but because the distribution of inheritances is more equal than the distribution of wealth among heirs, less wealthy heirs will inherit more relative to the wealth they already hold prior to receiving the inheritance.

Fig. 3shows how the inherited amounts vary with the wealth of heirs. Looking ﬁrst at absolute amounts (right axis), we see that wealthier heirs inherit more money.²⁰For example, heirs in the fourth wealth decile (ranked before inheriting) receive inheritances worth, on average, SEK 64,000, whereas heirs in the top decile inherited, on average, SEK 193,000. Thus, there is a positive association between the heirs' wealth and the amount inherited, which explains why absolute dispersion increases. When looking at the relative importance of inheritances instead, dividing inheritances by the heirs' wealth, the pattern is reversed. Heirs in the fourth wealth decile receive inheritances that are larger than their own wealth, whereas heirs in the top decile receive inheritances worth only one twentieth of their wealth. This pattern explains the decrease in relative wealth inequality among heirs. Relatively poor heirs often inherit amounts that are large relative to their own wealth, while this is typically not the case for richer heirs.

The equalizing effect can be explained solely by the distribution of wealth among the decedents being more equal than the distribution of wealth among the heirs. Any factor affecting wealth accumulation processes among the donor generation and the heir generation may thus affect how inheritances affect the wealth distribution among heirs.²¹Still, inheritances appears to be more equally distributed than the wealth of the decedents, which then contributes to the equalizing effect weﬁnd. Several mechanisms may be responsible for why the distribution of inheritances is more equal than the distribution of wealth among the decedents. Below, we address the importance ofﬁve such mechanisms.

First, if wealthier decedents have more children, their estates will be distributed among more lots, causing each child to inherit less than he

or she would have done had there been fewer children.²²However, weﬁnd no support for this mechanism. In particular, richer decedents do not have more children than less wealthy decedents and variation in the number of children has no important impact on the results. See panel A inTable 4, and Online Appendix B.3.1 for details.

Second, if wealthier decedents testate a disproportionally larger share of their wealth to charities, the heirs would inherit less than they would have done in the absence of charitable bequests. In our data, we see that wealthier decedents indeed testate a larger fraction of their estate to charities. This in line with the literature on charitable contributions at death (see, e.g.,Joulfaian, 2001).²³However, even among the wealthiest decedents, only 2.5% of the estate goes to charity.

Moreover, a counterfactual analysis, in which we redistribute the charitable bequests to the heirs, produces DMEs that are essentially identical to the main ones. We are therefore conﬁdent that charitable bequests among the rich are not the driver behind theﬁnding that inheritances lead to lower relative inequality. See panel B inTable 4, and Online Appendix B.3.2 for details.

Third, if wealthier decedents circumvent the default succession rules by writing wills stating that part of their wealth should go to individuals outside the succession order, each heir would inherit less than he or she would have done in the case of intestacy. We address the relevance of this mechanism by calculating the hypothetical inheritance each child would receive in the absence of wills. The DMEs from this counterfactual exercise are largely similar to the main results, suggesting that the equalizing effect cannot be explained by richer decedents' preferences for distributing their wealth among more heirs. The results also suggest that the limited freedom to testate in the Swedish and Roman inheritance law tradition (Pestieau, 2003) is not the driver of the equalizing effect. See panel C inTable 4, and Online Appendix B.3.3 for details.

Fourth, intergenerational transfers consist of both inheritances at death and gifts that the decedents give to their heirs during their life- time, i.e., inter vivos. If substantial amounts were transferred during the years just prior to the inheritance, the interpretation of our results

19The correlation between donors' wealth and heirs' wealth (both measured in T-1) is 0.2 in the Analysis sample and 0.4 in the Children sample. We also illustrate the positive relationship between heirs' wealth and decedents' estate wealth in Figure B2.

20Theﬁrst three deciles are omitted because wealth is negative, which would confound the illustration of inheritance to wealth ratios.

21Fundamentally, this boils down to factors affecting disposable income and savings, like income growth and the design of tax and transfer systems.

Fig. 3. Absolute and relative sizes of inheritance by pre-inheritance wealth decile. Wealth (SEK 1000) and inheritance (SEK 1000) are presented in 2003 constant prices for the 2002–2004 cohorts. Wealth deciles 1–3 are omitted because of negative wealth values.

Mean wealth and mean inheritance for deciles 1–3 are SEK–115,000 and SEK 53,000, respectively.

22A standard implication of any model of intergenerational transfers is that the degree of equalization increases with the number of children (see, e.g.,Stiglitz, 1969;Atkinson and Harrison, 1978), and, if wealthy decedents have more children, inheritances seemingly have an equalizing effect.

23A growing stream of literature is studying end of life charitable giving (see e.g.James, 2009andMeer and Rosen, 2013).